Magazine article Journal of Property Management

Where - House?

Magazine article Journal of Property Management

Where - House?

Article excerpt

A wave of inventive projects and initiatives proves repositioning a viable option to reinvent struggling warehouses by Amanda Druckman

It seems common property management knowledge these days that a surefire way to resuscitate an underperforming warehouse facility is to reposition and convert it to another use. While the practice may seem like a no-brainer, there are many challenges and tasks associated with such an undertaking, whether it's working harmoniously with a municipality or paying visits to existing tenants during construction.

Repositioning is not a new concept. For years managers and owners have taken facilities facing financial hardship and transformed them into properties better suited to the current market. Given the urban trend of taking old warehouses and converting them to hip, new office and condominium projects often featuring a retail component, there is plenty to be learned from recent developments of this nature.

"Property managers are on the front line for helping owners fully understand and rationalize a project's repositioning or conversion potential," said Jeffrey L. Hardy, managing director at Trammell Crow, AMO, in San Jose, Calif. "[Managers'] detailed understanding of the asset's current physical specifications is paramount to establishing a baseline for economic and non-economic evaluation."

Hardy said: "From an ROI standpoint, if you can double the value of the asset in 18-24 months, which equates to a 42 percent internal rate of return, that's the threshold to make a conversion worthwhile. If not, the risk is too great. [You have to] understand what is needed in the neighborhood, what the gross revenues are coming from those types of property, cost of construction. Also, add the cost of demolishing your existing property because you'll be losing your income stream for a period of time. All of the service providers necessary are expensive, not to mention legal fees, architect fees, engineer fees. If the projected returns look like they could be double what you're getting now, then pursue it. It doesn't make sense on smaller assets, those worth less than $5 million, because all the upfront costs are the same regardless of project size."

REPOSITIONING EQUALS REBIRTH

For Jones Lang LaSalle's Brad Despot, the Chicago repositioning project he led, 600 West Chicago, was more about a neighborhood rebirth than the conversion of a single property. The project, which saw the conversion of 1.5 million square feet of an old riverfront Montgomery Ward's facility to an office and retail center, spurred the development of other neighboring properties.

"We started the process with the concept of a live-work-play environment," Despot said. "The city of Chicago was adamant that the riverfront serve as the backbone of the neighborhood, so we worked with our developer to incorporate that into our plans." Despot and his team of developers and leasing agents worked to turn an underperforming facility and neighborhood into one that was seen as a destination, featuring trendy new restaurants, public transportation options and the general sense of excitement that often accompanies a new development area, not to mention the Enterprise Zone tax credits that provide significant project cost savings.

The project comes with all the trappings of today's modern urban development, taking advantage of the traditional physical features of a warehouse to transform it to functional office and retail space. The renovation included a complete restoration of the building's façade, entryway and windows, as well as a facelift to the facility's interior and systems. A state-of-the-art telecommunications infrastructure, on-site parking structure, dock and freight capabilities and significant floor loads of 150-250 pounds per square foot are additional attractions. More than 400,000 square feet has been occupied by new tenants during the last year.

"Only now that the development has come together can people see the full vision [of a redeveloped neighborhood] as a reality," Despot said. …

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